Watts Charges on a Separate Property residence, Mohler changes everything!

HouseWhen an individual enters a marriage owning a home, and the community pays the mortgage during the marriage, California case law has developed a formula known as Moore/Marsden, which allows us to determine the community’s pro tanto interest in a spouse’s separate property. Click here for our article that explains the Moore/Marsden calculation.

Most times, the spouse who owned the home prior to the marriage will continue to live in the home after the parties separate, and sometimes it can take years for the non-owner spouse to receive their share of the community’s interest in the home per the Moore/Marsden calculation. Is there any relief for the non-owner spouse?

Recently, the Court in In re Marriage of Mohler (2020) 47 Cal. App. 5th 788, held that if the owner-spouse continues to live in their separate property home after separation, but the community has an interest in the home per Moore/Marsden, the trial court may charge the owner-spouse with a Watts charge. Named after a 1985 California Court of Appeals case, Watts charges compensates a party for the other party’s exclusive use of a community asset after separation. The out of the house spouse can request a “charge” against the other party who is in exclusive possession of the asset for half of the asset’s use value. This issue typically arises when one spouse continues to live in the home after separating, and the reasonable use value is usually determined to be the difference between the mortgage and rental value of the home.

What is notable about Mohler is that the appellate court ordered the trial court to account for Watts charges for the post-separation exclusive use of the separate property home that the community obtained an interest in via the Moore/Marsden principals, where in the past Watts charges were usually ordered only when a spouse had exclusive use of a community property asset post-separation.

The following example illustrates the application of a Watts charge on a separate property home that the community developed an interest in during the marriage.

Nancy purchased a home in 2005 when she was single. She is the only one on the mortgage and on title. Nancy marries John in 2010, and John moves into her home. Nancy and John pay the mortgage during the marriage with their earnings. In January 2015, Nancy and John separate and file for divorce, John moves out of the home, and Nancy continues to reside in her home. Their divorce is not final until five years later in 2020.

Nancy and John both agree that the community’s interest in Nancy’s home pursuant to the Moore/Marsden equation is 30% (15% to Nancy and 15% to John). Nancy’s mortgage is $1,000 per month; however, she could rent her home for $1,500. Because John has a 15% interest in the home, he is losing $75 per month in rental income.

The Mohler case tells us that John could request the trial court apply a Watts charge to Nancy’s use of the home after he moved out. If the court agrees, Nancy would owe John $75 per month for the five years it took to resolve the case, or $4,500, in addition to his 15% Moore/Marsden interest in the gains realized on the home during marriage.

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